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Green bonds show their worth as $1trn market beckons

IN DEPTH | The ability to earn profits while fighting climate change makes investors happy — and could help green bonds become a $1 trillion annual market by 2020, writes Anamaria Deduleasa

Debt instruments such as green bonds that raise capital for climate-friendly projects have been around for a decade, yet it is only in the past few years that they have taken centre stage as an innovative and lucrative way to finance the fight against climate change.

Their value topped $100bn last year, and while these bonds resemble more traditional debt instruments in terms of structure and returns, their goal is to finance “green projects”, ranging from wind farms to smart buildings, and even helping fossil-fuel companies become more carbon efficient.

Just like market value, interest in green bonds has been steadily growing to such an extent that, not only are they breaking financial records — being repeatedly oversubscribed and raising billions of dollars — but they have managed to attract a completely new set of players to the market.

“[The green bond] will not replace other means of financing renewables, but it has created another pool of money and it’s going to bring in other investors that so far have been reluctant to enter the renewables market directly with equity,” says Ariola Mbistrova, a finance analyst with WindEurope.

Figures show that the value of green bond issuances grew from just $37bn in 2014, to $42bn in 2015 and $82.6bn in 2016. Last year, the $100bn benchmark was passed, with around €60bn ($42.45bn) of bonds issued in Europe alone, according to the Climate Bonds Initiative (CBI), a non-governmental organisation that promotes the debt market as a way to raise money for climate-related projects.

While still only a tiny fraction of the $100trn global bond market, green bonds have room to grow, with the CBI estimating that $1trn of them could be issued annually by 2020.

Issuers of green bonds have proved to be incredibly diverse, ranging from China Development Bank and German-Dutch transmission system operator TenneT to Spanish renewables developer Iberdrola and even oil & gas giant Repsol.

And that is where their importance lies, because a big part of green bonds’ selling point is that these instruments can help governments and companies achieve the targets set out in the Paris climate change agreement, while also making a positive return on investment.

“The market conditions are right for green bonds,” says Mbistrova. “The bonds are beneficial and are a win-win situation for both the seller and the buyer, or the investor. People are taking advantage of the low-interest-rate environment.

“There is a business case for renewables; there is no risk of it becoming a stranded asset any time soon. There is not going to be a collective shutdown like there was with coal.”

Essentially, there are two types of green bonds on the market: project green bonds and corporate green bonds. When a project green bond is issued, investors are made aware that the proceeds will be used solely on one green project, in most cases, Mbistrova says, a large wind farm.

In comparison, a corporate green bond is issued by one company or a group, with a wider range of projects in need of financial support. As a result, proceeds are often shared between multiple business units of that entity.

In 2017, around €18bn-worth of green bonds were issued by companies to finance wind developments, according to WindEurope’s preliminary figures.

Iberdrola has been issuing green bonds since 2014, largely to refinance its onshore wind farms, with the company’s round in November raising €1bn to refinance renewables projects in the UK. The bond was three times oversubscribed, proving once again the market’s appetite.

Iberdrola agrees 'world's largest green finance deal' for $6.6bn

In January 2018 Iberdrola signed agreements covering €5.3bn ($6.55bn) of ‘green loans’ with 24 institutions, said to represent the world's largest sustainable finance transaction so far.

“Iberdrola is issuing green finance instruments in line with its strategy of contributing to the fight against climate change through clean-energy investments,” Jesús Martínez, head of treasury and finance at Iberdrola, tells Recharge.

“As we are carrying out an ambitious investment plan of €25bn by 2020, mostly in renewables and smart grids, we thought we could match our liabilities accordingly, to try to facilitate market recognition while at the same time diversifying our sources of financing, an important objective for our financial strategy.”

Utility SSE last year issued a €600bn green bond — the largest ever issued by a British company — to help refinance its portfolio of recently constructed or under-construction onshore wind farms in the UK and Ireland.

“Investors are not only motivated by pure environmental considerations; they are also making pragmatic decisions about where they put their money,” a company spokesperson tells Recharge. “Climate change presents a material long-term risk to certain investments. Investing in a green bond that finances assets to mitigate climate change helps to manage that risk over the long term.”

Meanwhile, global offshore wind leader Ørsted, previously Dong Energy, issued its first green bonds at the end of last year — to raise €1.25bn to fund new and existing offshore wind projects, convert coal plants to sustainable biomass, as well as energy-efficiency and energy-storage projects.

“The issuing of the bonds is yet another step forward in the transition to green energy,” says Ørsted, which sold its legacy oil & gas assets in May.

Mbistrova says that while green bonds have indeed created a new source of financing for renewables, more importantly, they have brought in new players. “It’s a good opportunity for investors whose main business is not wind to associate themselves with these sort of projects. It’s a marketing thing.”

For example, she says, a green bond issued in France helped the French Post Office invest for the first time in a wind-energy transaction.

“When you are inexperienced [in wind energy], that’s the way you want to go,” Mbistrova explains.

TenneT launches $1bn green bond to back renewables plans

In the aftermath of the Paris Agreement, investors have been dipping in and out of the clean-energy business, and there has been an increase in the number of fossil-fuel companies getting involved in “green” projects.

“If we’re going to make a transition to a low-carbon economy, we have to see fossil fuels money finance green energy,” says CBI chief executive Sean Kidney. “We would welcome oil & gas companies-issued green bonds, as long as those bonds are used to finance assets that are relevant in the transition period. But this requires ambition.”

Since the first green bond was issued in 2007 by the European Investment Bank, this financial instrument has been steadily growing to become another brick in the foundation of a low-carbon future.

What is noteworthy, though, is that it has reshaped the conversation around the cost of making a difference. And, as the market continues to evolve, if anything, green bonds can offer a compelling opportunity to achieve social impact while still earning a respectable market yield.

Are green bonds always green?

The value of the green bonds market worldwide may have topped $100bn last year, but industry experts say market growth has been constrained by a lack of comprehensive standards for designing and evaluating climate-related financing instruments.

Green bonds are currently issued under voluntary certification schemes, including the Climate Bonds Standards and Green Bond Principles. These schemes offer broad guidelines for transparency and disclosure, but they do not establish a universal standard for “green”.

Green bonds could double again to $200bn, says Moody's

“We were critical recently of a bond issued by Repsol,” says Sean Kidney, chief executive of the Climate Bonds Initiative.

“They made some investments in proving the carbon efficiency of a gas plant but they were not particularly ambitious investments, and we were a bit disappointed. It’s an improvement, but this is not a big achievement.”

Some renewables and sustainability players would like to see only the most high-quality assets pass eligibility criteria, while others do not want guidelines to be “too strict” as you want to be able to offer a suitable solution for different issuers and situations.

“There are no regulations, but, as the market grows, you need more [regulations],” says Kidney. “What we are trying to do is to ensure that we have some sort of international standards because globally, we need money to move. We need money to go from rich countries to poor countries,” says Kidney.

While this lack of regulations displays the potentially volatile character of the bonds, the International Energy Agency (IEA), says that this shows that the market is “evolving”.

“Prior to 2013, green bonds were issued mainly by supranational institutions, which helped establish the market,” an IEA spokesperson explains. “Since then, though, the role of the private sector has increased significantly, with more offerings from corporations and commercial and investment banks in the energy sector.

“The shift from public to private issuance can be attributed to the development of a market-governance structure for labelling, disclosure of use of proceeds and verification requirements of green bonds.

“This has reduced transaction costs for investors and alleviated concerns about the environmental integrity of projects and perceived risk, while enabling issuers to meet demand from investors with environmental objectives,” explains the IEA.

Not just for private companies

The European Investment Bank (EIB) issued the first recorded green bond in 2007. As of 2017, the World Bank had issued a total of 130 green bonds worth more than $10bn, while its International Finance Corporation (IFC) arm had issued 77 green bonds worth $5.8bn.

Even the French government delivered a €7bn ($8.3bn) sovereign green bond in January last year and eight other nations, including Nigeria, have announced plans to follow suit.

In addition, municipal and local government-issued green bonds are a growing trend, with Massachusetts leading the way in June 2013. Since then, the US states of California and New York, the Canadian province of Ontario and the South African city of Johannesburg have also issued green bonds.

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Green bonds show their worth as $1trn market beckons

Green bonds show their worth as $1trn market beckons

IN DEPTH | The ability to earn profits while fighting climate change makes investors happy — and could help green bonds become a $1 trillion annual market by 2020, writes Anamaria Deduleasa

Debt instruments such as green bonds that raise capital for climate-friendly projects have been around for a decade, yet it is only in the past few years that they have taken centre stage as an innovative and lucrative way to finance the fight against climate change.

Their value topped $100bn last year, and while these bonds resemble more traditional debt instruments in terms of structure and returns, their goal is to finance “green projects”, ranging from wind farms to smart buildings, and even helping fossil-fuel companies become more carbon efficient.

Just like market value, interest in green bonds has been steadily growing to such an extent that, not only are they breaking financial records — being repeatedly oversubscribed and raising billions of dollars — but they have managed to attract a completely new set of players to the market.

“[The green bond] will not replace other means of financing renewables, but it has created another pool of money and it’s going to bring in other investors that so far have been reluctant to enter the renewables market directly with equity,” says Ariola Mbistrova, a finance analyst with WindEurope.

Figures show that the value of green bond issuances grew from just $37bn in 2014, to $42bn in 2015 and $82.6bn in 2016. Last year, the $100bn benchmark was passed, with around €60bn ($42.45bn) of bonds issued in Europe alone, according to the Climate Bonds Initiative (CBI), a non-governmental organisation that promotes the debt market as a way to raise money for climate-related projects.

While still only a tiny fraction of the $100trn global bond market, green bonds have room to grow, with the CBI estimating that $1trn of them could be issued annually by 2020.

Issuers of green bonds have proved to be incredibly diverse, ranging from China Development Bank and German-Dutch transmission system operator TenneT to Spanish renewables developer Iberdrola and even oil & gas giant Repsol.

And that is where their importance lies, because a big part of green bonds’ selling point is that these instruments can help governments and companies achieve the targets set out in the Paris climate change agreement, while also making a positive return on investment.

“The market conditions are right for green bonds,” says Mbistrova. “The bonds are beneficial and are a win-win situation for both the seller and the buyer, or the investor. People are taking advantage of the low-interest-rate environment.

“There is a business case for renewables; there is no risk of it becoming a stranded asset any time soon. There is not going to be a collective shutdown like there was with coal.”

Essentially, there are two types of green bonds on the market: project green bonds and corporate green bonds. When a project green bond is issued, investors are made aware that the proceeds will be used solely on one green project, in most cases, Mbistrova says, a large wind farm.

In comparison, a corporate green bond is issued by one company or a group, with a wider range of projects in need of financial support. As a result, proceeds are often shared between multiple business units of that entity.

In 2017, around €18bn-worth of green bonds were issued by companies to finance wind developments, according to WindEurope’s preliminary figures.

Iberdrola has been issuing green bonds since 2014, largely to refinance its onshore wind farms, with the company’s round in November raising €1bn to refinance renewables projects in the UK. The bond was three times oversubscribed, proving once again the market’s appetite.

Iberdrola agrees 'world's largest green finance deal' for $6.6bn

In January 2018 Iberdrola signed agreements covering €5.3bn ($6.55bn) of ‘green loans’ with 24 institutions, said to represent the world's largest sustainable finance transaction so far.

“Iberdrola is issuing green finance instruments in line with its strategy of contributing to the fight against climate change through clean-energy investments,” Jesús Martínez, head of treasury and finance at Iberdrola, tells Recharge.

“As we are carrying out an ambitious investment plan of €25bn by 2020, mostly in renewables and smart grids, we thought we could match our liabilities accordingly, to try to facilitate market recognition while at the same time diversifying our sources of financing, an important objective for our financial strategy.”

Utility SSE last year issued a €600bn green bond — the largest ever issued by a British company — to help refinance its portfolio of recently constructed or under-construction onshore wind farms in the UK and Ireland.

“Investors are not only motivated by pure environmental considerations; they are also making pragmatic decisions about where they put their money,” a company spokesperson tells Recharge. “Climate change presents a material long-term risk to certain investments. Investing in a green bond that finances assets to mitigate climate change helps to manage that risk over the long term.”

Meanwhile, global offshore wind leader Ørsted, previously Dong Energy, issued its first green bonds at the end of last year — to raise €1.25bn to fund new and existing offshore wind projects, convert coal plants to sustainable biomass, as well as energy-efficiency and energy-storage projects.

“The issuing of the bonds is yet another step forward in the transition to green energy,” says Ørsted, which sold its legacy oil & gas assets in May.

Mbistrova says that while green bonds have indeed created a new source of financing for renewables, more importantly, they have brought in new players. “It’s a good opportunity for investors whose main business is not wind to associate themselves with these sort of projects. It’s a marketing thing.”

For example, she says, a green bond issued in France helped the French Post Office invest for the first time in a wind-energy transaction.

“When you are inexperienced [in wind energy], that’s the way you want to go,” Mbistrova explains.

TenneT launches $1bn green bond to back renewables plans

In the aftermath of the Paris Agreement, investors have been dipping in and out of the clean-energy business, and there has been an increase in the number of fossil-fuel companies getting involved in “green” projects.

“If we’re going to make a transition to a low-carbon economy, we have to see fossil fuels money finance green energy,” says CBI chief executive Sean Kidney. “We would welcome oil & gas companies-issued green bonds, as long as those bonds are used to finance assets that are relevant in the transition period. But this requires ambition.”

Since the first green bond was issued in 2007 by the European Investment Bank, this financial instrument has been steadily growing to become another brick in the foundation of a low-carbon future.

What is noteworthy, though, is that it has reshaped the conversation around the cost of making a difference. And, as the market continues to evolve, if anything, green bonds can offer a compelling opportunity to achieve social impact while still earning a respectable market yield.

Are green bonds always green?

The value of the green bonds market worldwide may have topped $100bn last year, but industry experts say market growth has been constrained by a lack of comprehensive standards for designing and evaluating climate-related financing instruments.

Green bonds are currently issued under voluntary certification schemes, including the Climate Bonds Standards and Green Bond Principles. These schemes offer broad guidelines for transparency and disclosure, but they do not establish a universal standard for “green”.

Green bonds could double again to $200bn, says Moody's

“We were critical recently of a bond issued by Repsol,” says Sean Kidney, chief executive of the Climate Bonds Initiative.

“They made some investments in proving the carbon efficiency of a gas plant but they were not particularly ambitious investments, and we were a bit disappointed. It’s an improvement, but this is not a big achievement.”

Some renewables and sustainability players would like to see only the most high-quality assets pass eligibility criteria, while others do not want guidelines to be “too strict” as you want to be able to offer a suitable solution for different issuers and situations.

“There are no regulations, but, as the market grows, you need more [regulations],” says Kidney. “What we are trying to do is to ensure that we have some sort of international standards because globally, we need money to move. We need money to go from rich countries to poor countries,” says Kidney.

While this lack of regulations displays the potentially volatile character of the bonds, the International Energy Agency (IEA), says that this shows that the market is “evolving”.

“Prior to 2013, green bonds were issued mainly by supranational institutions, which helped establish the market,” an IEA spokesperson explains. “Since then, though, the role of the private sector has increased significantly, with more offerings from corporations and commercial and investment banks in the energy sector.

“The shift from public to private issuance can be attributed to the development of a market-governance structure for labelling, disclosure of use of proceeds and verification requirements of green bonds.

“This has reduced transaction costs for investors and alleviated concerns about the environmental integrity of projects and perceived risk, while enabling issuers to meet demand from investors with environmental objectives,” explains the IEA.

Not just for private companies

The European Investment Bank (EIB) issued the first recorded green bond in 2007. As of 2017, the World Bank had issued a total of 130 green bonds worth more than $10bn, while its International Finance Corporation (IFC) arm had issued 77 green bonds worth $5.8bn.

Even the French government delivered a €7bn ($8.3bn) sovereign green bond in January last year and eight other nations, including Nigeria, have announced plans to follow suit.

In addition, municipal and local government-issued green bonds are a growing trend, with Massachusetts leading the way in June 2013. Since then, the US states of California and New York, the Canadian province of Ontario and the South African city of Johannesburg have also issued green bonds.

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